What’s the Point(s)

Subprime Crisis No Barrier to Affordable Housing
Image by woodleywonderworks via Flickr

As a Loan Officer, one of the questions I am asked most frequently goes something along the lines of “what are points and how do they work?”

In the United States we tend to like sports with lots of action and lots of points being scored. So from a perspective of athletics, seeing your favorite Football team put a beat down on your most hated rival is awesome.  The more points the better.  Time to high-five the guy with his entire face painted like an angry cheetah or the small kids that are wearing their favorite athlete’s jersey number.

With mortgages it’s not quite so simple.

On any given day, a range of rates will be available to consumers.  Each rate will either have a corresponding credit or charge associated with it.  Down payment, credit scores, occupancy of the property – all have an influence over what sort of fee is charged for any given interest rate.  This cost or credit is then passed on to the consumer.

For rates that have a corresponding cost associated with them, the cost is known as points.  Points are a percentage of the loan amount that are paid for a specific rate and terms.  One point is the equivalent of 1% of the loan amount.  Ultimately, the consumer can choose what they feel is the best option for them.

There is no “one size fits all” solution when it comes to what points to pay for a mortgage.  For a first time buyer that has limited funds, it may be a better strategy to pay a slightly higher rate and have less costs due at the time of settlement.  On the other hand, for a consumer looking to refinance and get the absolutely lowest payment possible since Coolidge was in office, paying more in points may make sense.  This same consumer can then run around the neighborhood thumping his/her chest and high-fiving strangers.  They may even ask to borrow your angry cheetah makeup kit.


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